Commencing Pensions before age 60

Commencing Pensions before age 60

I would like to tell you about a little known ruling from the ATO.  It's unfortunate that not many people know about it, because lots of people are missing out on a big opportunity.

This ruling particularly affects people aged 55-59 who are above average income earners and fall into one of these categories:

• They are retired, OR
• They have non-preserved superannuation money

These people would often be advised to wait until they turn 60 in order to commence a pension.  The rationale for this advice is that any income stream payments they receive before age 60 will be taxed at their marginal tax rate less 15%.  So if they are on the top marginal rate (currently 49% including Medicare) then they will pay tax of 34% on their pension income.  This tax will exceed the tax saved by their SMSF should they start a pension.  Effectively the common belief is that trustees have to make a choice between paying tax on investment income in the SMSF (by remaining in accumulation), or paying tax on the pension income (by commencing a pension).

Not so...

Determination SMSFD 2013/2 states that lump sum withdrawals from a pension account (which are generally tax free up to a lifetime limit of $185,000) count towards minimum pension income.  So if your client has an account based pension then they can satisfy the minimum pension requirements by making lump sum withdrawals.  Some important points to consider:

• The Pension needs to be an account based pension.  The ATO has since clarified that if the pension is a Transition to Retirement pension then it needs to be sourced from non-preserved funds.
• The $185,000 is a lifetime limit, not an annual limit
• The preservation age of 55 will start increasing next year, and the $185,000 referred to will increase each year.

So now some informed trustees can have their cake and eat it too!

THIS ARTICLE WAS CORRECT AT THE TIME OF WRITING. SMSF RULES CHANGE OVER TIME AND THE ARTICLE MAY BE LESS RELEVANT IN THE FUTURE. 

THIS STRATEGY IS NO LONGER VIABLE AND THE PRESERVATION AGE HAS INCREASED SINCE THIS ARTICLE WAS WRITTEN.